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Retirement income today should not be measured by one’s net worth; it’s about the predictable, spendable income in the bank account every single month.  Chances are, your monthly Social Security payments will not be enough, so you will likely need a 401(k), work-sponsored pension, some sort of IRA or a combination of all three options to be truly financially prepared.  Keep in mind that even if you’re retiring today, your money may need to last for 30 years throughout your retirement.

The reality is, if you’re retired or nearing retirement, you need to find a way to pay the bills for many years to come. Your Social Security income will help, but you need to supplement that with additional income, and you may need to fund your retirement for 30 years or more. You need to have enough money to cover health care during retirement in addition to the expenses of daily life.  Good health and longevity are great – as long as you can pay the freight.

Investors often spend decades working and saving to build a nest egg for retirement. During that time, their primary investment goal is to see their assets grow. When retirement finally arrives, the primary investment goal often changes from seeking to grow assets to using those assets to generate income. The investments used to pursue this new goal need to change accordingly.

Others have experienced investment or other financial struggles from the recession and had to use funds previously allocated to retirement for daily necessities.  It’s important to adjust the allocation of your retirement savings as you get older. In general, the closer you get to retirement, the less risky you want to be with your investments.

We’ve all seen the statistics that stocks have consistently outperformed bonds and cash over long periods of time. However, the older you get, the less time you have to recover from market downturns and the more your asset mix needs to be weighted toward low-risk vehicles that deliver asset preservation.  In short, the more aggressively you invest in stocks vs. bonds and other conservative investments, the more your retirement nest egg is likely to grow over time, unless there is a market downturn.

Now, there is an important caveat to this. To invest aggressively, you need a high risk tolerance. In other words, you must be able and willing to tolerate fluctuations in the value of your account. For example, in the worst year (during the 2008 financial crisis), the more conservative portfolio would have declined in value about 17.5% while the more aggressive portfolio would have declined in value by nearly 29%.

If you panic at such a time and move your money out of stocks, you’ll turn a temporary loss into a permanent one. Not getting sleep in tough times is the price you pay for higher returns. As they say, there’s no such thing as a free lunch, and that applies to investing as well.

Many people have difficulty understanding common retirement investment products such as target date mutual funds: fixed income securities (bonds): annuities: mutual funds other than target date funds: dividend stocks etc.  But the complexity of certain products isn’t the only challenge facing consumers here. In some cases, having more investment options may lead to simply bow out of the investment process because of the work required to sort through their choices.  Too many choices leads to lower participation in certain plans.

If you’re feeling paralyzed by your choices or confused by financial jargon, the best thing may be to block out all the “noise.” What I tell people, regardless of their age or wealth, is to focus on things they can control, when asked how to combat information overload.

For example, stock market prices and interest rate trends tend to impact retirement choices, but they can’t be controlled by investors. Instead of fixating on that type of investment news and information, workers should pay more attention to the following. How much they spend/save (cash flow), the timing of their retirement age and their level of investment risk (asset allocation.

With the markets hitting all-time highs recently, it’s hard to believe that just five years ago, the Dow was in the four-digit range.  If you are thinking about retirement back then, you probably had second thoughts — and rightfully so. But just because things appear to be on the up-and-up doesn’t guarantee that future years will follow suit.  But if the market starts to tank, you can then decide to switch over to safety-first before they lose so much assets.

Of course, there’s never been any certainty when it comes to financial markets, but it seems that today’s times are more uncertain than ever. That makes retirement — a time that should be a carefree period full of reward for your decades of hard work and saving — curiously cumbersome.

Retirement income affects how do-it-yourself investors design their portfolios, even if they don’t consciously realize it.  Most people face a likely shortfall in their ability to cover their expenses through a retirement that could last more than 30 years.  The safety-first method matches assets to liabilities. That is, it takes a look at the money (assets) available to pay the bills (liabilities) in retirement.

To try to bridge the gap between assets and liabilities, safety-first proponents advocate using guaranteed income, such as annuities or bonds. These products turn a lump-sum investment into an income stream that either lasts for life, as with most annuities, or for a fixed number of years, as with an individual bond. With an annuity, planners don’t have to worry about predicting the duration of a client’s retirement, since the income stream will last for life.

Combined with Social Security, monthly income from an annuity or bond could help ensure that a retiree meets his necessary expenses, such as food, utilities and housing. Anything left over would go toward discretionary expenses such as entertainment and travel.

Annuities: A Life-Long Income Stream – At one point in time, many retirees could count on life-long payments in the form of pension checks. With pensions disappearing at an alarming rate, investors seeking a predictable life-long income stream can purchase an annuity in exchange for a lump-sum payment. An annuity can be purchased as the primary vehicle designed to deliver all the income a retiree needs, or it can be one component of a larger portfolio.

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Saturday, November 22nd, 2014 Wealth Management Comments Off

Don’t Jeopardize Your Financial Independence

Long-term care refers to a wide range of medical and non-medical services – including custodial help with daily activities, nursing care and skilled nursing services – for people who are physically or mentally unable to care for themselves. Home health care, adult day care, respite care, assisted living and nursing home care all fall into the category of long-term care.

I don’t think a lot of individuals think enough about that uncertainty. In fact, when I talk to older individuals, they see it happening around them, but they say, “Well, that won’t happen to me.” So, there is sort of a head-in-the-sand, ostrich [mentality] to saying, “Well, I won’t have to deal with that.  Even though the longer you live, the more likely some degree of expenditure will be needed to support a frailer existence.

Many Americans assume that Medicare will cover these costs. However, coverage is limited and may still require large out-of-pocket expenses. Also, Medicare pays for skilled nursing facility care only after a discharge from a three-day hospitalization. It does not pay for custodial or intermediate care, and the majority of care provided in nursing homes is custodial, which includes assistance with dressing, eating and moving around.

After an individual has exhausted all of their assets, they may qualify for coverage under Medicaid. However, with Medicaid, an individual and their family members lose choice over the care received.

“A long-term care insurance policy can save you from having to deplete your assets to provide for care. “In some sense it’s lifestyle preservation to ensure you have a choice in your care. At the same time, it’s asset preservation – allowing you to pass something to your heirs.”

But the interesting thing to me–and I call it the second half of retirement problem–is the question of thinking about the period of frailty, generally post age 80, sometimes post age 85, sometimes post age 75, where you’re actually alive and well but need additional support in the form of long-term care–and that includes home nursing care (incidental or around the clock), assisted living, or true long-term nursing care.

And those liabilities sort of come on you suddenly. It’s not like you sit down and think, “In five years, I’ll the long-term care.” It could be the next day; it could be 10 years. And they require suddenly large drawdowns from your portfolio.

Until recently, consumers had few choices when it came to long term care insurance. Traditional policies, which provided a certain amount of selected coverage, were the norm. Policies could be designed to cover care expenses for a few months, or much longer, even providing benefits for the insured’s lifetime.

For example, consumers could purchase coverage that would provide $100 a day in benefits for a period of three years. When calculated, the $100 daily benefit multiplied by 365 days in a year for 3 years would create a $109,500 “pool of money” available for care.

This pool of money would pay for care in a nursing home, assisted living facility, adult day care, or in the personal residence of the policyholder once certain criteria had been met.

When the pool of money was depleted, the traditional policy would provide no more benefits. However, if the policy was never used, the owner would lose the investment of his or her premium payments. Thus, some seniors opted not to purchase these policies, deciding instead to rely on their families or current savings in the event that care became necessary.

With the cost of health care rising rapidly, and a single day in a nursing home costing $175 or more in major cities, self insuring is a risky proposition. Relying on family is an alternative, but not necessarily a viable one. Unfortunately, most families do not have the time, resources or ability to provide around the clock care to a loved one.

The average cost for a private room in a nursing home is more than $87,000 per year, according to the 2014 Cost of Care Survey produced by Genworth, a financial-services company.

And the average cost of an assisted living facility, which provides a level of care that is not as extensive as that offered by a nursing home, is $42,000 per year, according to the same Genworth study. All long-term care costs have risen steadily over the past several years, with no indication that they will level off.

Many people, when they think about long-term care at all, believe that Medicare will pay these costs — but that’s just not the case. Typically, Medicare only covers a small percentage of long-term care expenses, which means you will have to take responsibility.

Of course, if you are fortunate, you may go through life without ever needing to enter a nursing home or an assisted living facility, or even needing help from a home health-care aide. But given the costs involved, can you afford to jeopardize your financial independence — or, even worse, impose a potential burden on your grown children?

To prevent these events, you will need to create a strategy to pay for long-term care expenses — even if you never incur them. Basically, you have two options: You could self-insure or you could “transfer the risk” to an insurer.

In response to customer demands, insurance companies have designed what can be best described as hybrid or linked policies. These policies combine the benefits of an annuity or life insurance agreement with a traditional long term care contract. With hybrid policies, the consumer has the guarantee of long term care benefits or, if no care is needed, the promise of insurance benefits to themselves and their beneficiaries.

The Long Term Care Annuity -The newest addition to the hybrid marketplace is the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy.

There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit. Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.

The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted. For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed. Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.

These innovative products can meet consumer demands and provide more guarantees by combining traditional long term care insurance with the advantages of life insurance or annuity policies. Thus, consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses and have the peace of mind associated with a comprehensive plan.

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Monday, November 17th, 2014 Wealth Preservation Comments Off

Retirement is the biggest purchase you’ll make in your life

Clearly, if Americans expect to cover most of their retirement expenses with sources of guaranteed income, they are going to have to fund more of this from their own savings. Recent stock market volatility has brought concerns about retirement savings and income into sharper focus. Adding to those concerns, thanks to the Federal Reserve holding down interest rates, our savings have not grown for five years.

Retirement is the biggest purchase you’ll make in your life – bigger than your home and the cost of every vacation you’ve taken.  Retirement will last many years and there are numerous unknowns.  For a married couple both age 65, one is expected to be living at age 90…and reaching 100 or more is no longer rare.  No doubt you’ll face many financials risks.

Sequencing your withdrawals”- Guaranteed-return places like annuities that offer principal protection, tax-deferral and conversion to a guaranteed lifetime income should not be overlooked to avoid spending down when your investments have losses.

It seems that every financial journalist and fee-only advisor I come across hates annuities, but unfortunately many of them don’t understand them well enough to be giving advice on them.  I admit that annuities can be very confusing, but they also offer some very attractive income benefits that will prevent you from outliving your money – guaranteed. Show me a stock or a mutual fund that can promise that?

Immediate income annuities, longevity annuities and indexed annuities offer income benefits that can either be setup to pay for an individual or a couple (for a joint payout, the benefit is usually lower).  How much you get all depends on the insurance company, type of annuity, amount you have to invest, and when you start taking the money.

Fixed-indexed annuities (sometimes referred to as indexed annuities) offer attractive features such as principal protection and guaranteed income benefits. Since the market collapse of 2008, indexed annuities have become much more popular. With indexed annuities, your principal is protected in years the market loses money no matter how steep the losses.

Where Indexed Annuities Really Flourish is the availability of Income Riders -.If you’re tired of seeing your investments rise and fall with the Dow Jones, then an equity indexed annuity might be a good fit.  You want to diversify. You might be a strong believer in the markets, but a little certainty never hurt anyone. Taking some money and locking it up in annuity with a guaranteed income rider could make sense.

A Fixed Index Annuity (FIA) is a fixed annuity with an interest rate that is linked to the performance of a stock index (the S&P 500 for example). Some insurance companies also give you the ability to get guaranteed future income account growth between 5% and 8% annually through the income rider.

An income rider on a fixed or fixed indexed annuity allows a retiree to build a secure retirement income. The issuing insurance carrier guarantees the payout provided by the income rider for the life of the annuity owner, as well as bearing all of the investment and longevity risk on the guaranteed payout — which means that the consumer is completely protected from these risks.

Some annuity carriers even provide for the income to substantially increase in case the annuity owner is confined to a nursing home, further sheltering the annuity owner from risk. In addition, the annuity owner retains access to the annuity’s remaining value and continues to reap the benefits of interest credits to the annuity’s value.

The income rider is optional and there’s usually a fee associated with it, but for the right person, it can be one of the best retirement prizes ever invented. The reason: an income rider can guarantee a great income that will last your whole life, whether you live to be 85, 95, or 125. The income rider is such an attractive benefit that nearly 3 out of 4 fixed index annuity purchasers elect this option.

If you have five to ten years before you actually need to draw income. Income riders are a viable option for those that want to avoid the market and want to have a guaranteed income stream at retirement. With the income account increasing each year for each year that you’re not touching it, this can be a huge benefit for someone who has a chunk of money that can invest it and sit on it for a few years.

Beware: The Benefit Base- is the annuity’s value that GLWB Guaranteed Withdrawal Payments are based upon. This is a separate value from the account value, and it is only available by taking Guaranteed Withdrawal Payments. If you have a fixed index annuity with an income rider that pays 6.5% compounded, it does NOT mean that you are making 6.5% annually on your money.

Rather, the rider guarantees that the insurance company will credit 6.5% to a separate income-only account. That’s a difference you need to understand. This income account value can only be taken as income, and only by the initial contract owner. Again, a guaranteed lifetime income or withdrawal benefit is typically optional on a fixed annuity, and is added to the annuity by a rider. Whereas the annuity has an accumulation value to determine the death benefit or annuitization, the rider also adds a second value: the income value.

Accumulation Benefit- With income riders, the income value is completely separate from the accumulation value. It typically grows at a fixed rate of interest, and when the retiree elects to start taking lifetime withdrawals, a payout factor is applied to the income value to determine the guaranteed annual withdrawal.

If the accumulation value is higher than the income value when the policyholder decides to withdraw the income, then the accumulation value is used in the payout calculation instead. Once the amount of guaranteed withdrawal is calculated, the retiree may withdraw that amount from the annuity every year for life.

A common feature on GLWBs which guarantees that the Benefit Base will grow by a specified percentage (4% – 12%), as long as the annuity contract is held in deferral and lifetime income payments are not taken. This percentage is not a bonus or a guaranteed annual return on the base contract. It can only be realized if the annuitant holds the policy in deferral, and is usually limited to a specified number of years (usually ten).

Say that a 60 year old invests $250,000 into an IA and wants to start taking a guaranteed monthly benefit, (assume 4%) they would have a $10,000 ($250,000 x 4%) guaranteed annual income for life.  Where income riders get even sweeter.  If you’re a 60 year-old individual that has $250,000 to invest but doesn’t plan on retiring until 65 or later, then the income benefit riders becomes that much more attractive.  Insurance companies will give an additional credit to the income account that, in turn, gives you a potential higher payout when you need it.  Let me explain……

A 60-year old may get a 5% income credit increase each year up until the day they decide to start taking their money. That means that the insurance company will add 5% a year to original deposit (in this case $250k) each year. Once you start taking your income, the payout will be the amount in your income account multiplied by the withdrawal percentage based on your age.

The table below illustrates this over a 10 year period.


1          61         $262,500           $10,500

2          62         $275,625           $11,025

3          63         $289,406.25      $11,576.25

4          64         $303,876.56      $12,155.06

5          65         $319,070.38 (5% payout begins)        $15,955.51

6          66         $335,023.89      $16,751.19

7          67         $351,775.08      $17,588.75

8          68         $369,363.83      $18,468.19

9          69         $387,832.02      $19,391.60

10         70         $407,223.62      $20,361.18

The 5% income credit is for hypothetical purposes. Each insurance company will have their own set interest rate.  Recently, I’ve seen anywhere from 5% all the way up to 7%. Another thing to consider is that the maximum withdrawal percentage is typically lower if you’re looking for a lifetime guarantee for you and your spouse.

While taking these withdrawals, the retiree is provided with two very valuable guarantees.

  1. Although the annual withdrawals are deducted from the accumulation value, the additional interest (declared or indexed) continues to be credited to the accumulation value, and the retiree retains access to the remaining accumulation value at all times.
  2. Even if the annual withdrawals ultimately deplete the accumulation value, the issuing carrier must continue making the annual payments as long as the retiree lives.

Outliving your money – this is the greatest fear of most retirees and is called longevity risk, the risk your retirement money will fall short or be depleted before you’ve run out of time.  If your family has a history of longevity, outliving your money might top your list of retirement worries.  With people now living well into their 80s, and often into their 90s, it’s a legitimate concern.

The only true guaranteed source of lifetime income comes in the form of an annuity.  One benefit of income annuities is that they can take some of the guesswork out of retirement planning. For example, it’s easier to figure out how to make a retirement nest egg last until these payments begin than it is to figure out how to stretch it over an uncertain lifetime.

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Saturday, November 15th, 2014 Wealth Management Comments Off

Is Sandwich Generation Family Members Last Expenses Covered

Are you part of the ”sandwich generation”?  So what is the “sandwich generation?” This term refers to those of us who have our own children to care for, and are also providing care for our parents. With today’s economy, many households now consist of three generations of family members living under one roof.

Having a family member or someone else close to you die with no life insurance to cover all the costs of their final wishes can no doubt be stressful, and can cause hardship and often resentment amongst family members.

If you lose a family member, you will likely be responsible to pay for the cost of their funeral and burial services. While some people may have money saved up that they can pass to their loved ones to cover these costs, quite a few people have died and passed the financial burden to their loved ones and family members. What many people do not realize is that even the most affordable funerals still cost several thousand dollars. Some of the costs of the funeral include:

  • Funeral service including officiator, location rental for service, and other accommodations
  • Flowers, photos, programs, and other service decorations
  • Funeral procession costs, including vehicles
  • Casket and case
  • Cemetery plot and headstone or marker
  • Other miscellaneous costs including accommodations for guests and refreshments

All too often a loved one’s wishes for their final arrangements are compromised because there is no life insurance, or there simply isn’t enough money to carry out those wishes. Today, total costs for funeral expenses and final arrangements can be as high as $12,000 or more depending on Individual choices and desires.

Today, more companies are giving out offers to join them by getting life insurance for seniors even at the age of 80. The statistical analysis from the health sector enables us to see why this is the case. Today more than ever, the number of people who are able to live longer than 90 years is on the increase in a developed nation like the United States.

The rise in technology in the health sector and the improvement in medical care is enabling us to see our grandmas and our grandfathers more in this earth for longer periods. Such diseases as high-blood pressure, diabetes, and conditions like high or low sugar levels can now be easily monitored and necessary measure taken to combat the condition.

However, everyone is destined to die someday, some sooner than others, since mortality is a certainty for all humans. Therefore, every individual has to accept the fate that he/she may die today or tomorrow. It is natural for people to become more prone to illnesses and diseases as they age.

Many seniors choose to buy a life insurance plan to provide their spouse with money to maintain their lifestyle, or to help out with their own final expenses including a funeral, memorial service, burial costs and other relates expenses.  Whenever you take a burial insurance cover and your sudden death occurs, your family does not have to be troubled a bit about the expenses involved in the funeral ceremony.

Here are a few major reasons why seniors need a life insurance:

Final Expenses - Funeral expenses: In the event of the death of one senior partner, the other senior partner may lack the funds required for the funeral. There are expenses that should immediately be addressed after the death of a loved one. These entail the funeral and burial costs. These may amount to thousands of dollars. Suddenly, the children or relatives of the deceased are faced with a burden. An insurance cover would come handy under such circumstances.

This is when life insurance plays an important role. It can answer all the expenses associated with the funeral and burial. The insurance coverage will handle all relevant matters that need to be paid after death. This will certainly take away the worries concerning the services that are observed after a person’s death. In this respect, senior citizens need to have the peace of mind that they deserve.

Living expenses and debts - When a person retires from work and he/she has no other source of income, survival in this world can be difficult, since money is important in every aspect. Its value in life cannot simply be ignored. If you do not have enough savings and no one is around to look after you, then, you will encounter financial difficulty during the remaining years of your life.

As a solution, senior life insurance will not only cover the expenses after death, but will also allow you to withdraw money from your savings account whenever needed (if you have purchased a whole life insurance policy). You do not have to ask help from anyone, just to live a dignified life during your twilight years.

Savings for the Family - It is important to think about the future of your spouse after you die. When you die, the pension money stops, but if your spouse is your beneficiary, he/she can use the money to survive during the remaining years of life. As a policy owner, it is up to you to choose anyone as your beneficiary. It can be one of your family members or a charitable trust.

It is very important to be honest when applying for life insurance. Make sure to give accurate information pertaining to your age, height, weight, gender, occupation and hobbies when filling out your application. Standard policies include a 2-year contestable period, during which the insurance provider can rescind the policy because of fraud or misrepresentation. Therefore, avoid omitting any relevant information. Furthermore, do not make any misrepresentations that are likely to invalidate the policy.

Because the costs of a funeral can range widely and unexpected costs can quickly add up, purchasing a burial insurance policy is a good pre-emptive decision. Don’t make your loved ones worry about costs when the only thing they should worry about it honoring you in the best way possible.

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Tuesday, November 11th, 2014 Wealth Preservation Comments Off

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